Global wheat offers have been on a slippery slide over the last month as confidence grows around new crop northern hemisphere production. This is especially the case in the Black Sea region, where early season concerns around dryness and late planting have been placated by favourable winter and early spring conditions.
The results of last week’s tender by Egypt’s General Authority for Supply Commodities (GASC) confirmed the much lower new crop price regime. It also asserted the Black Sea regions eagerness to get back in the game following the export tax confusion that has dominated market talk, and action, in recent months.
The market was quite surprised that Egypt issued a tender so close to their own harvest, which is expected to commence this week. The shipment period was also a surprise as GASC rarely tenders as far out the curve as they did last week. Speculation suggests this demonstrates confidence around domestic production, with the government hoping to procure 3.5 to 4MMT from local growers this season.
When the tender closed last Tuesday, GASC had received around 1.25 million metric tonne (MMT) of offers. There was 400,000 metric tonne of Russian wheat tendered, with all prices falling within a one-dollar range. No French wheat was furnished, but the cheapest offers from Russia, Ukraine and Romania were all within US$1.65 of each other, underlining the competitive nature of the new crop Black Sea market.
The lowest price was Russian origin at US$234 free on board (FOB) which is around US$230 FOB after additional GASC costs are taken into account. Nominally, this equates to around US$209 after the export tax is applied. The variable rate tax is currently set at 70 per cent of export price above US$200 FOB. Who knows what it will be by the time the grain is actually shipped, such is the uncertainty around the Russian government’s market intervention?
GASC ended up buying six cargoes totalling 345,000 metric tonne for August 1-10 shipment, of which five were Russian origin and one will be shipped out of Ukraine. The prices ranged from US$251 to US$252.75, including cost and freight (C&F), with the average price paid coming in at US$252.09/mt. This was US$45.31 cheaper than the average price paid for six Romanian cargoes in their last tender back on March 11 for April 15-25 shipment.
The old crop / new crop market inverse for wheat out of the Black Sea has been evident for some time, and once production concerns eased, new crop prices were always going to decline. However, this is still one of the largest downward moves GASC has witnessed between tenders for many years. It highlights the eagerness of Russian exporters to get some new crop sales on their books, despite the export tax burden and uncertainty.
The Russian Federal State Statistics Service, Rosstat, released its final 2020/21 production numbers last week, calling the national wheat crop a record 85.9MMT. Debate now revolves around the volume of exports, with the USDA raising its estimate by 0.5MMT to 39.5MMT in last week’s WASDE report. Leading agricultural consultancy SovEcon currently has exports pegged at 38.9MMT.
However, both are at the high end of estimates, with some in the trade as low as 35MMT. Either way, 2020/21 carry out stocks will increase compared to the previous season, with the USDA forecasting a 67 per cent increase to 12MMT and others as high as 17MMT. This will obviously add to new crop supplies and potentially increase Russia’s exportable surplus if the production outlook remains favourable through to harvest.
On the new crop front, SovEcon added 1.4MMT to its Russian production forecast last week due to vastly improved crop conditions in the country’s south. The updated estimate of 80.7MMt would be the third-largest crop on record, but it does come with a caveat around production concerns in Russia’s central regions, where crop health is mixed.
Favourable early spring weather and an optimistic forecast for the balance of April has consolidated Ukraine’s new crop wheat production estimate at 26.7MMT. This is smack on the average of the last six years. Even in the driest cropping districts, soil moisture levels are at or above the long-term average, which augurs well for crop development as the spring temperatures begin to rise in the second half of April.
The big sleeper in this whole Black Sea wheat supply equation are the rising tensions between Russia and Ukraine. They have been simmering since the illegal annexation of the Crimean Peninsula in 2014, but there have been several deadly clashes in recent weeks leading to a build-up of troops and tanks on the Russian side of the border.
As Ukraine is geographically divided between Europe and Russia, so too are the people divided; pro-Russian and pro-Western. Pro-Russian separatists also claim control over eastern Ukraine, including the Donbas region, which they have illegally controlled for the past seven years. It is not the impact on production that is a concern. It is the potential disruption to trade flows out of the Black Sea region if the conflict escalates.
The building expectation of a bumper harvest in the Black Sea region is weighing on Australian export prices. Russia is the world’s biggest exporter of wheat and the global export price setter. While Australia enjoys a substantial freight advantage into Southeast Asia, the substantially lower new crop Russian price means Australian export offers have had to adjust lower to compete with the aggressive Black Sea offers.
After enjoying prices in excess of US$300 C&F Indonesia earlier in the marketing campaign for Australian Premium White (APW) wheat, prices are quoted in the US$280 to US$285 C&F range for nearby business. But exporters have to compete with new crop Black Sea offers of US$270 to UD$272 C&F into Indonesia for July/August shipment.
With soil moisture conditions ideal for planting in Western Australia, New South Wales and Queensland, there is already potential for another big Australian crop. This will increase pressure to clear the exportable surplus from last year’s record crop necessitating competitiveness against new crop Black Sea exports in the second half of the year.
Call your local Grain Brokers Australia representative on 1300 946 544 to discuss your grain marketing needs.